BASIC ENTRY DECISIONS FOR INTERNATIONAL BUSINESS

There are three decisions that a firm contemplating foreign expansion must make. They are; which markets to enter, when to enter those markets, and on what scale.

First: Which Foreign Markets to Enter?

            There are more than 160 nation-states in the world, but they do not all hold the same profit potential for a firm contemplating foreign expansion. Ultimately, the choice must be based on an assessment of the nation’s long-run profit potential. This potential is a function of several factors like economic and political factors that influence the potential attractiveness of a foreign market. The attractiveness of a country as a potential market for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country.

It should also be noted that the long-run economic benefit of doing business in a country are a function of factors such as the size of the market(in terms of demographics), the present wealth (purchasing power) of consumers in that market, and the likely future wealth of the consumers. While some markets are very large when measured by numbers of consumers (examples: China and India), low living standard may imply limited purchasing power and relatively small market when measured in economic terms.

The costs and risks associated with doing business in a foreign country are typically lower in economically advanced and politically stable democratic nations and they are greater in less developed and politically unstable nations. A firm can rant countries in terms of their attractiveness and long-run profit potential, preference is given to entering market that ranked highly.

Second:         Timing of Entry

Once attractive market has been identified, it is important to consider when to enter those markets. Entry is early an international business enters a foreign market before other foreign firms and entry is late when an international business enters after other international businesses have already established themselves. The advantages frequently associated with entering a market early are commonly known as first-mover advantages.

One first-mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name. A second advantage is the ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantages over later entrants. This cost advantage may enable the early entrant to cut prices below the higher cost structure of the later entrants, thereby driving them out of the market.

A third advantage is the ability of the early entrant to create switching costs that tie customers into their product or service. Such switching costs make it difficult for later entrant to win business. There can also be disadvantages associated with entering a foreign market before other international businesses. These are often referred to as first-mover disadvantages. These disadvantages may give rise to pioneering costs.

Pioneering costs are costs that an early entrant has to bear which later entrant can avoid. Pioneering costs arise when the business system in a foreign country is so different from that in a firm’s home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game. Pioneering costs include the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes. A certain liability is associated with being a foreigner, and this liability is greater for foreign firms that enter a nationals market early. Recent research seems to confirm that the probability of survival increases if an international business enters a national market after several other foreign firms have already done so. The late entrant may benefit by observing and learning from the mistake made by early entrants.

Third:             Scale of Entry and Strategic Commitment.

The final issue that an international business needs to consider when contemplating market entry is the scale of entry. Entering a market on a large scale involves the commitment of significant resources.

Not all firms have the resource necessary to enter on a large scale, and even some large firms prefer to enter foreign markets on a small scale and then build slowly as they become more familiar with the market.

The consequences of entering on a significant scale are associated with the value of the resulting strategy commitments. A strategic commitment is a decision that has a long-term impact and is difficult to reverse. Deciding to enter a foreign market on a significant scale is a major strategic commitment. Strategic commitments, such as large scale market entry, can have an important fluency on the nature of competition in a market.

The value of the commitments that flows from large-scale entry into a foreign market must be balanced against the resulting risks and lack of flexibility associated with significant commitments. But strategic inflexibility can also have value. Balanced against the value and risks of the commitment associated with large-scale entry are the benefits of a small-scale entry. Small-scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market. Small-scale entry can also be seen as a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter. By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry. But lack of commitment associated with small-scale entry may make it more difficult for the small-scale entrant to build market share and to capture first-mover or early- mover advantages.